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VRTA > SEC Filings for VRTA > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for VESTIN REALTY MORTGAGE I, INC.

Form 10-Q for VESTIN REALTY MORTGAGE I, INC.


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a financial review and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2011 and 2010. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2010.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, without limitation, matters discussed under this Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as "believes," "anticipates," "expects," "intends," "plans," "projects," "estimates," "assumes," "may," "should," "will," or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties of this Quarterly Report on Form 10-Q and in our other securities filings with the Securities and Exchange Commission ("SEC"). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation. As a result, such estimates are not guarantees of the future value of the collateral. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

OVERVIEW

Our primary business objective is to generate income while preserving principal by investing in real estate loans. We believe there is a significant market opportunity to make real estate loans to owners and developers of real property whose financing needs are not met by other real estate lenders. The loan underwriting standards utilized by our manager and the mortgage brokers we utilize are less strict than those used by many institutional real estate lenders. In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders. As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks. However, in return, we seek a higher interest rate and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio. While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.

Our operating results are affected primarily by: (i) the amount of capital we have to invest in real estate loans, (ii) the level of real estate lending activity in the markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the interest rates we are able to charge on our loans and (v) the level of non-performing assets, foreclosures and related loan losses which we may experience.

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Our operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets. This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations. See Note F - Real Estate Held for Sale and "Non-performing Loans" in Note D - Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

We believe that the current level of our non-performing assets is a direct result of the deterioration of the economy and credit markets during the past several years. As the economy weakened and credit became more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects were unable to complete their projects, obtain takeout financing or were otherwise adversely impacted. While the general economy experienced a recovery in 2010 and early 2011, the commercial real estate markets in the areas where we make loans continued to suffer from depressed conditions. These depressed conditions persist in 2011 as the weak economic recovery and the threat of a double dip recession has prevented a recovery of real estate values in our principal markets. Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures. Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.

We expect that the weakness in the commercial real estate markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future. This may result in further defaults on our loans and we might be required to record additional reserves based on decreases in market values or we may be required to restructure additional loans. This increase in loan defaults has materially affected our operating results and led to the suspension of dividends to our stockholders. For additional information regarding our non-performing loans see "Non-Performing Loans" in Note D - Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

During the nine months ended September 30, 2011, we funded four loans totaling approximately $3.1 million. No loans were funded during the nine months ended September 30, 2010. As of September 30, 2011, our loan-to-value ratio was 75.4%, net of allowances for loan losses, on a weighted average basis, generally using updated appraisals. Additional increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an "as-is-basis," will have a material adverse effect on our financial condition and operating results. The current loan-to-value ratio has been affected by declining real estate values, which have eroded the market value of our collateral.

As of September 30, 2011, our loans were in the following states: Arizona, California, Nevada, Oregon and Texas.

On October21, 2011, we filed a notice of annual meeting of stockholders to be held December 15, 2011 for the following purposes:

1. To elect two directors to serve until the 2014 Annual Meeting of Stockholders and until their successors are duly elected and qualify;

2. To consider and vote upon the ratification of the appointment of JLK Partners, LLP as the independent registered public accountants of the Company for the fiscal year ending December 31, 2011;

3. To consider and vote upon an amendment to the Company's Bylaws to expand its investment policy to include investment in and acquisition, management and sale of real property or the acquisition of entities involved in the ownership or management of real property;

4. To consider and vote upon an amendment to the Company's charter to change the term of the Company's existence from expiration December 31, 2020 to perpetual existence; and

5. To transact such other business as may properly come before the meeting or any postponement or adjournment thereof.

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The Company's board of directors has fixed the close of business on October 17, 2011, as the record date for the determination of the stockholders entitled to notice of, and to vote at, the Annual Meeting and any postponement or adjournment thereof. Only those stockholders of record of the Company as of the close of business on that date will be entitled to vote at the Annual Meeting or any postponement or adjournment thereof.

All stockholders are cordially invited to attend the Annual Meeting in person. Whether or not you plan to attend, please authorize your proxy by on e of the methods described in the accompanying Proxy Statement. Should you receive more than one proxy because your shares are registered in different names and addresses, each proxy should be voted to assure that all your shares will be voted. You may revoke your proxy at any time prior to the Annual Meeting. If you attend the Annual Meeting and vote by ballot, your proxy will be revoked automatically and only your vote in person at the Annual Meeting will be counted.

The Board of Directors of the Company has appointed a special committee to enter into negotiations with Vestin Realty Mortgage II, Inc. regarding a proposed stock for stock merger; however, the stock for stock ratio has not yet been determined. The compensation that is being paid to the special committee is $17,500, plus $500 per meeting. In addition, the Company entered into an Indemnification Agreement with each special committee member indemnifying each of them for any judgments, penalties, fines, settlements, and expenses related to any action or suit, or other proceedings threatened, pending or completed against such committee member. In furtherance of the proposed merger, the Company has engaged Milestone Advisors, LLC as its financial advisor and Miles and Stockbridge as counsel to the special committee. The primary purpose of the proposed merger is the potential cost savings and operating synergies that could be achieved through a combination with VRM II. Any decision with respect to the proposed merger with VRM II will be subject to the approval of the special committee and stockholders of Vestin VRM II as well as the approval of our special committee and stockholders. There can be no assurance that the proposed merger will be consummated.

SUMMARY OF FINANCIAL RESULTS

Comparison of Operating Results for the three months ended September 30, 2011, to the three months ended September 30, 2010.

Total Revenues: For the three months ended September 30, 2011, total revenues were approximately $0.1 million compared to approximately $0.2 million during the three months ended September 30, 2010, a decrease of approximately $0.1 million or 43%. Revenues were primarily affected by the decrease in interest income. Our revenue is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. Interest income has been adversely affected by the level of non-performing assets in our portfolio and the reduction in new lending activity. We expect all of these factors will continue to have an adverse effect upon our operating results during 2011.

For additional information see Note D - Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Operating Expenses: For the three months ended September 30, 2011, total operating expenses were approximately $0.9 million compared to approximately $0.7 million during the three months ended September 30, 2010, an increase of approximately $0.2 million or 17%. Expenses were primarily affected by an increase in provision for loan losses of approximately $0.6 million and offset by a decrease in professional fees of approximately $0.4 million. The professional fees have decreased due to a significant decrease in pending litigation for the three months ended September 30, 2011 compared to the same period in 2010.

Total Non-Operating Income (Loss): For the three months ended September 30, 2011, total non-operating income was approximately $0.3 million, compared to a loss of approximately $0.9 million during the three months ended September 30, 2010. Total non-operating income was primarily affected by the following factors:

During the three months ended September 30, 2010, we recognized an impairment of our marketable securities - related party of approximately $0.5 million. There was no comparable impairment during the same period in 2011.

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During the three months ended September 30, 2010, we recognized a settlement expense of approximately $0.3 million related to the Nevada Lawsuit. See Note M - Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q. There was no comparable expense during the same period in 2011.

During the three months ended September 30, 2011, we recorded revenue of approximately $0.3 million from our investment in equity method investee held for sale, compared to a loss of $52,000 during the three months ended September 30, 2010.

Total Loss from Real Estate Held for Sale: For the three months ended September 30, 2011, total losses from REO were approximately $0.2 million compared to approximately $0.1 million during the three months ended September 30, 2010, an increase of approximately $0.1 million or 172%. The increase is mainly due to an increase in write downs on real estate held for sale during the three months ended September 30, 2011, compared to write downs on real estate held for sale during the three months ended September 30, 2010.

Comparison of Operating Results for the nine months ended September 30, 2011, to the nine months ended September 30, 2010.

Total Revenues: For the nine months ended September 30, 2011, total revenues were approximately $0.4 million compared to approximately $0.9 million during the nine months ended September 30, 2010, a decrease of approximately $0.5 million or 59%. Revenues were primarily affected by the decrease in interest income. Interest income has been adversely affected by the level of non-performing assets in our portfolio and the reduction in new lending activity. We expect all of these factors will continue to have an adverse effect upon our operating results during 2011.

For additional information see Note D - Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Operating Expenses: For the nine months ended September 30, 2011, total operating expenses were approximately $1.7 million compared to approximately $1.9 million during the nine months ended September 30, 2010, a decrease of approximately $0.3 million or 14%. Expenses were primarily affected by an increase in provision for loan losses of approximately $0.5 million and offset by a decrease in professional fees of approximately $0.8 million. The professional fees have decreased due to a significant decrease in pending litigation for the nine months ended September 30, 2011 compared to the same period in 2010.

Total Non-Operating Income: For the nine months ended September 30, 2011, total non-operating income was approximately $0.9 million, compared to a loss of approximately $0.9 million during the nine months ended September 30, 2010. Total non-operating income was primarily affected by the following factors:

During the three months ended September 30, 2010, we recognized an impairment of our marketable securities - related party of approximately $0.5 million. There was no comparable impairment during the same period in 2011.

During the three months ended September 30, 2010, we recognized a settlement expense of approximately $0.3 million related to the Nevada Lawsuit. See Note M - Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q. There was no comparable expense during the same period in 2011.

During the three months ended September 30, 2011, we recorded revenue of approximately $0.7 million from our investment in equity method investee held for sale, compared to a loss of approximately $52,000 during the three months ended September 30, 2010.

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Total Loss from Real Estate Held for Sale: For the nine months ended September 30, 2011 and 2010, total losses from REO were approximately $0.5 million

For additional information see Note F-Real Estate Held For Sale of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Dividends to Stockholders; Reliance on Non-GAAP Financial Measurements: To maintain our status as a REIT, we are required to declare dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regard to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of noncash income over 5% of our REIT taxable income, determined without regard to the dividends paid and our net capital gain. Because we expect to declare dividends based on these requirements, and not based on our earnings computed in accordance with GAAP, we expect that our dividends may at times be more or less than our reported earnings as computed in accordance with GAAP. During the nine months ended September 30, 2011, we did not declare any cash dividends.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income or cash flows from operations determined in accordance with GAAP as a measure of operating performance. Our total taxable income represents the aggregate amount of taxable income generated by us and our wholly owned taxable REIT subsidiary, TRS I, Inc. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of TRS I, Inc., which is not included in REIT taxable income until distributed to us. Subject to certain TRS value limitations, there is no requirement that the TRS I, Inc. distribute their earnings to us. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of dividends to our stockholders, we believe that presenting investors with the information management uses to calculate our taxable income is useful to investors in understanding the amount of the minimum dividends that we must declare to our stockholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies have identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to those reported by other companies.

The table below reconciles the differences between reported net loss and total estimated taxable loss and estimated REIT taxable loss for the nine months ended September 30, 2011:

                                                                           For the
                                                                         Nine Months
                                                                            Ended
                                                                          September
                                                                          30, 2011
Net loss, as reported                                                    $  (850,000 )
Add (deduct):
Provision for loan losses, net of recoveries                                 702,000
Write down of REO                                                            273,000
Settlement of loan pursuant to troubled debt restructuring which was
previously fully reserved                                                   (986,000 )
Total estimated taxable loss                                                (861,000 )
Add : Estimated taxable loss attributable to TRS I, Inc.                          --

Estimated REIT taxable loss                                              $  (861,000 )

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CAPITAL AND LIQUIDITY

Liquidity is a measure of a company's ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes. Subject to a 3% working capital reserve, we generally seek to use all of our available funds to invest in real estate loans. Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months. We may pay our manager an annual management fee of up to 0.25% of our aggregate capital received by us and Fund I from the sale of shares or membership units.

During the nine months ended September 30, 2011, net cash flows used in operating activities approximated $1.8 million. Operating cash flows were adversely impacted by the decrease in interest and other receivables of approximately $0.7 million, provision for loan loss of approximately $0.7 million, write-downs on real estate held for sale of approximately $0.3 million and income from equity method investee of approximately $0.7 million. Cash flows related to investing activities consisted of cash provided by loan and notes receivable payoffs of approximately $0.8 million, distributions from our investment in equity method investee held for sale of approximately $0.4 million, cash used for purchases of investments in real estate loans of approximately $3.7 million, and purchase of marketable securities of approximately $0.5 million. Cash flows from financing activities consisted of cash used in payment of notes payable of approximately $0.1 million and purchase of treasury stock of approximately $0.1 million.

At September 30, 2011, we had approximately $3.1 million in cash, and approximately $20.9 million in total assets. We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of REO and/or borrowings. We believe we have sufficient working capital to meet our operating needs during the next 12 months.

Since we comply with the REIT requirements and distribute at least ninety percent (90%) of our annual taxable income, our sources of liquidity include:
repayments of outstanding loans, dividend reinvestments by our stockholders, arrangements with third parties to participate in our loans and proceeds from issuance of note payable and secured borrowings. We rely primarily upon repayment of outstanding loans and proceeds from sales of REO to provide capital for investment in new loans. The significant level of defaults on outstanding loans has reduced the funds we have available for investment in new loans. Resulting foreclosure proceedings may not generate full repayment of our loans and may result in significant delays in the return of invested funds. This has diminished our capital resources and impaired our ability to invest in new loans. During June 2008, our Board of Directors decided to suspend the payment of dividends. Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect them to be reinstating dividends in the foreseeable future. We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our REIT taxable income.

We have no current plans to sell any new shares. Although a small percentage of our shareholders have elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume. Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the foreseeable future.

We are considering various options to enhance the Company's capital resources. We have, and may continue to, raise funds through the issuance of promissory notes secured by certain of our real estate owned properties. However, we do not currently have any arrangements in place to increase our capital resources.

On February 21, 2008, our board of directors authorized the repurchase of up to $5 million worth of our common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. During the nine months ended September 30, 2011, we used approximately $104,000 to acquire 78,600 shares of our common stock. We are not obligated to purchase any additional shares. As of September 30, 2011 and December 31, 2010, we had a total of 534,207 and 455,607, respectively, shares as treasury stock carried on our books at cost totaling $1.0 million and $0.9 million, respectively. For more information about our stock repurchase program, see Part II, Item 2 below.

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When economic conditions permit, we may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements. No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets we would be able to do so on commercially attractive terms. Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan portfolio.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential. The effective interest rates on all product categories range from 0% to 15%, as a result of troubled debt restructuring whereby, the total interest on one performing loan is being fully accrued and payable at maturity. Revenue by product will fluctuate based upon relative balances during the period. As of September 30, . . .

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